Following Russia’s aggression on Ukraine, the EU economy is faring better than initially expected

EU GDP growth in 2022 reached 3.5 %, compared with an initial forecast of 2.7 % in Spring 2022, and the economic slowdown at the end of the year did not turn into a recession.

The EU labour market has been extremely resilient. The unemployment rate has stabilised at a record-low level of about 6 %. Employment expanded at an annual rate of 2 %, with the job vacancy rate reaching historical highs and with many businesses reporting labour shortages.

At the same time, the number of hours worked per worker did not fully recover, but reverted back to its pre-pandemic long-term downward trend.

Employment and hours worked in the EU

Source

Eurostat, National accounts [namq_10_a10_e]. Hours worked per person employed are total hours worked divided by total employment.

I. General labour market conditions in the EU and its Member States 1 / 12

Employment growth has been supported by an increasing participation rate

Until 2019, the activity rate in the EU had been growing steadily for more than a decade.

This positive trend was only temporarily interrupted by the COVID19 pandemic: by the fourth quarter of 2022, the activity rate of men and women was 1.3 percentage points higher compared to the first quarter of 2020, contributing by 2 % to total employment growth, or almost 4 million jobs.

This increase in labour market participation concerned mainly women, older workers and foreign citizens (both EU and non-EU nationals). Policies aimed at improving work-life balance, reducing the gender pay gap and increasing the effective retirement age are thought to have contributed positively to this development.

The growth slowdown is not expected to lead to a significant increase in unemployment

The current growth slowdown in the EU is taking place in a context of very tight labour markets. A decrease in labour demand due to weak growth, therefore, should not lead to a significant increase in unemployment.

Nevertheless, the economic environment remains highly uncertain. The picture may change in case of a prolonged period of weak economic growth and/or increasing labour market frictions (linked for instance to rising skills mismatches).

I. General labour market conditions in the EU and its Member States 2 / 12

Employment by energy intensity (2019 Q4 = 100)

Note

Energy intensity is measured as Tera Joules per value added. The different groups are defined classifying 55 sectors of the economy on the basis of the quartile of the sectoral distribution of energy intensity. Seasonally adjusted data. Sectors excluded: mining and quarrying; manufacture of coke and refined petroleum; electricity, gas, air conditioning; public administration and defence, compulsory social security; education.

Source

Eurostat, Labour force survey [lfsq_egan22d, lfsq_egan2], energy statistics [env_ac_pefa04], National accounts [nama_10_a64].

The good labour market performance has been broad-based, but some differences are visible between economic sectors

As opposed to previous crises, countries with higher rates of unemployment have experienced larger declines, resulting in a convergence in unemployment levels.

At sector level, more energy-intensive industries have recorded lower employment growth. Yet, while the energy price shock held back new job creation, it did not lead to substantial employment losses.

I. General labour market conditions in the EU and its Member States 3 / 12

Since the beginning of 2022, nominal wage growth in the EU has been robust, but still well below inflation

On the one hand, tight labour market conditions and high inflation have fuelled wage growth. On the other hand, the increased uncertainty about labour market prospects, growing headwinds in some sectors and an increasing labour supply have contributed to mitigating wage increases.

As a result, growth in nominal compensation per employee reached 6 % in the second quarter of 2023 (on an annual basis), a record high for most Member States but a decline in real terms by 0.8 %.

According to the latest forecast, real wages are set to decline in 2023 by 0.8 % before moderately growing by 1.5 % in 2024, which would still leave them almost 2.8 % below their 2019 level.

In the current context, there is room for some further wage increases

The resilience in firms’ profit margins and moderate long-term inflation expectations suggest that there is room for further wage increases without igniting a wage–price spiral and jeopardising competitiveness.

The possibility of further wage increases, which appears to be larger in the service sector than in manufacturing, could help accommodate further increases in statutory minimum wages: minimum wage earners tend to be more represented in some services.

Real wages per employee, annual % change

Note

Real wages are computed using the HICP index as deflator.

Source

Ameco [5 0 0 0 HWWDW, 5 0 0 0 ZCPIH] and Eurostat [namq_10_gdp, namq_10_a10_e, prc_hicp_midx].

II. Wages and labour costs developments in the EU and its Member States 4 / 12

Long-term upward wage convergence in the EU has been stalling

From a longer-term perspective, the process of wage convergence between EU Member States (in purchasing power standards) has stalled since 2019. This suggests a prominent role for policies to facilitate upward wage convergence in the EU, by promoting productivity convergence and ensuring that workers can reap the benefits of these gains.

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Minimum wage developments in Member States with Statutory minimum wages

Note

CY excluded as the statutory minimum wage was introduced in 2022.

Source

Eurofound and Eurostat [earn_mw_cur, prc_hicp_midx].

The decline in real wages has been exacerbating the social effects of the cost-of-living crisis, although its impact on wage inequality is ambiguous

Since 2021, the rate of financial distress and of material and social deprivation have risen significantly among workers in the EU.

Minimum wage policies have mitigated losses in purchasing power for low-wage earners in a number of Member States, with positive effects in terms of reduced wage inequality and lower in-work poverty. In other countries, however, some sectors hit particularly hard by the crisis employ a larger share of low-wage earners, which could result in an increase in wage inequality in those Member States.

A range of policies can help foster sustainable wage increases

  • Statutory minimum wage policies.
  • Strengthened collective bargaining, including at sectoral and cross-industry level.
  • Policies promoting upskilling and reskilling, especially among low-skilled workers.
  • Enhancing firms’ productivity, successfully rolling out the twin green and digital transition.
  • Addressing the source of the high costs of living, by ensuring sufficient competition and diversifying supply chains.

II. Wages and labour costs developments in the EU and its Member States 6 / 12

Working time in the EU has been gradually declining due to social, economic and institutional factors

The main economic factor driving the long-term decline in hours worked has been technological progress.

  1. In the second half of the 20th century, tax policies and the bargaining power of workers also played a major role in the fall in working hours.
  2. Since 1995, the trends in working time have been mostly driven by increasing labour force participation of women, and the associated rise in part-time work.
  3. Labour market policies have also favoured adjustments in hours worked to tackle short-term shocks, as experienced during the COVID‑19 crisis

III. Working time reduction in the EU: recent patterns and main drivers 7 / 12

Between 2008 and 2022, the average weekly hours worked decreased in the EU by 2 %, while average annual hours worked decreased by 5 %. This decline has been driven mainly by the reduction of weekly hours worked by full-time employees and the self-employed, but with differences between Member States.

The recent acceleration of digitalisation, the rise of artificial intelligence, the spread of teleworking and a shift in workers’ preferences are factors that could lead to further reductions in working time in the near future.

  • 2008
  • -2% Average weekly hours worked
  • 2022
  • -5% Average annual hours worked

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Statutory limits and actual working hours vary between countries

In almost all Member States, statutory weekly hours are either capped at the limit of 48 hours (as set by the EU working time directive), or at a lower level of 40 hours. Only in Belgium and France is the limit lower.

The number of hours normally worked over the year differs significantly between Member States due to, among others, differences in the provision of vacation time and the level of economic development.

Statutory weekly hours: 48 hours or 40 hours. Only in Belgium and France is the limit lower

III. Working time reduction in the EU: recent patterns and main drivers 9 / 12

The number of hours worked is influenced by demographic and institutional factors as well as by individual preferences

Women, adults with care responsibilities and younger and older workers tend to work shorter weekly hours, while self-employed people, better educated workers and people with migrant backgrounds tend to work longer.

Involuntary part-time workers – who are mainly women – typically prefer to work longer, while workers with higher levels of qualification, on average, prefer to work fewer hours.

Overall, workers would prefer to work fewer hours on average, and the gap between the number of hours actually worked and the preferred number of hours has widened: from 2.2 hours per week in 2015 to 5.5 hours in 2021. This is due to a decline in the preferred number of hours among more educated workers and people who are financially better-off.

The availability of adequate care services, the degree of trade union density and businesses’ voluntary re-organisations of hours worked are among the institutional factors that can explain cross-country differences in average worked hours.

EU average workweek cumulative changes – decomposition on changes in working time and employment composition

Source

Own calculations using Eurostat LFS.

III. Working time reduction in the EU: recent patterns and main drivers 10 / 12

Past experiences with working time reduction policies can inform the current debate on working time

Reductions in working time typically increase workers’ well-being, although the impact may not be uniform for all groups of workers.

The effects on productivity can differ between sectors and occupations.

While working time reductions generally lead to higher hourly wages, this could lead to higher work intensity. Moreover, an increase in wages not matched by an increase in productivity could impact labour demand, with negative effects on employment.

A reduction in working hours could also contribute to removing gender bias in the labour market, especially if accompanied by policies that support a greater inclusion of women in the labour market.

Working time reduction in the EU: recent patterns and main drivers 11 / 12

Broadening the choice working hours and eliminating labour market rigidities can help reduce underemployment and overemployment

Based on past evidence, mandatory legislative reductions in working hours may not improve the welfare of groups of workers with different preferences. Tailored solutions could better address underemployment and overemployment.

In the current context of high labour shortages, options that broaden the choice of weekly work hours could better address the simultaneous presence of underemployment and overemployment in the labour market, for instance through a reduction of weekly hours for specific groups of workers through collective agreements or the voluntary re-organisation of work patterns within companies.

Preferred decrease in working hours by education and difficulty of making financial ends meet

Source

Eurofound and Eurostat [earn_mw_cur, prc_hicp_midx].

III. Working time reduction in the EU: recent patterns and main drivers 12 / 12